PPF entry: Problems for pension trustees after Olympic

Airlines
Summary
The Pension Protection Fund (PPF) was set up by the UK government in the year 2006, to protect members who had
defined benefits in a workplace pension scheme, where the employer became insolvent or could not afford to pay
those benefits promised to members on wind up. One of the conditions for PPF entry is usually that a UK insolvency
process has been started over the employer. Ultimately trustees may be able to trigger a UK liquidation themselves by
applying to court. But, in some circumstances, this can be more difficult for the trustees to arrange. Even if trustees
can show that the employer is insolvent, the court may not be able to place the employer into a UK insolvency process
if the employer has already entered an insolvency process in another EU Member State and has its centre of main
interests (COMI) in another EU Member State. There is an exception to this EU restriction on the ability to start a
UK insolvency process. A UK liquidation can commence as a secondary proceeding, even if a process has already
started in another EU Member State where the COMI is situated, but only if the employer has an "establishment" in
the UK at the date the claim is made to the court. So, if the trustees do not spot this and only look to take action after
the employer has ceased to have an establishment in the UK (which could have happened before the insolvency
starts), then the trustees will not be able to force a UK insolvency over the employer and enable entry into the PPF.
This was what affected the Olympic Airlines pension scheme. Despite paying the PPF levy, the scheme was ultimately
unable to place the airline employer into a UK insolvency process because the airline had ceased to have an
establishment in the UK before the winding-up petition was presented by the trustees to the English court. Ultimately
this was confirmed last year by the Supreme Court in Olympic Airlines Pension Trustees v Olympic Airlines
SA [2015] UKSC 27.

we should consider ascertaining whether each of the scheme employers has a COMI in the UK(bearing in mind that
even UK registered companies can have a COMI outside the UK). If any do not, and instead the employer's COMI is in
another Member State, the we will need to confirm whether it has an "establishment" in the UK. 

The Government has taken action to address some of these concerns. From April 2016, regulations amended the
terms of entry into the PPF by allowing schemes to enter the PPF in some cases without a UK insolvency process
being needed by way of an application by the trustees to the PPF. This will help to ease the potential for a scheme to
be stuck outside the PPF, but will still leave some issues for trustees. In practice trustees will still want to monitor the
position of the employers in relation to their COMI.

UK insolvency process is the main condition for PPF entry

For a qualifying UK pension scheme, the main condition that must be satisfied is that a ‘relevant insolvency event’ has
occurred in relation to the employer1. This is defined in the legislation2 as an insolvency event in the United Kingdom
(e.g. administration, creditors winding-up or court liquidation 3). An insolvency process over the employer outside the
UK does not count. The underlying reasoning for this restrictive approach is presumably that entry into the PPF only
occurs if the employer has become insolvent. The PPF has no discretion to allow a scheme into the PPF if this
condition is not met, and is not necessarily equipped to assess whether an overseas process is sufficiently equivalent
to insolvency under the recognised UK processes.

If a non-UK insolvency process starts over an employer outside the UK, which can occur if the employer is
incorporated outside the UK or the overseas country has jurisdiction for some other reason), a UK insolvency event
can still occur subject to the EU COMI point outline below. If they can show that the company is insolvent, trustees
will usually be able to force a winding-up in the UK by applying to a UK court. The grant of a winding-up order is
discretionary in the court, but if:

 there is a sufficient connection with the UK (which there will usually be, given the existence of the pension
scheme); and
 the winding-up would serve a proper purpose (which the trigger for entry into the PPF and also employee
claims on the national insurance fund will be),

then in practice a winding-up order will usually be made – see for example the court ruling in Re Eloc Electro-
Opieck5. A court in England and Wales may look to balance the interests of the relevant creditors (here the pension
scheme) against the interest of any other creditors: see for example Re Bank of Credit and Commerce International
SA6.
What is the EU COMI problem?
So if the employer is in financial difficulties, how does the trustee ensure that a UK insolvency event
occurs? Ultimately if the employer is a UK incorporated company with its COMI in the UK, then the
trustee should be able to trigger a UK insolvency process (e.g. by petitioning the court for a winding-up
order or an administration order).

This should also be the case if the employer is incorporated outside the UK or if it is a company
incorporated in a part of the UK but with a COMI outside the UK. Here the trustees would usually still be
able to start a UK insolvency process (usually a liquidation) by petitioning the court – subject to the point
made above about the discretion of the court.

There should not be an issue if the employer has its COMI outside the UK but in Denmark or a country
which is not an EU Member State. But there is potentially a problem if the employer has its COMI in
another EU Member State (other than Denmark).

The EC Insolvency Regulation 2000 provides that once insolvency proceedings have been opened in a
Member State (other than Denmark ) where the company has its COMI, secondary insolvency
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proceedings can only be opened in another Member State if the relevant company has an
"establishment" in that Member State (at the date on which the new proceedings are opened) –
Regulation 2(h), EC Insolvency Regulation 2000.

In 2015, in the Olympic Airlines case  the Supreme Court upheld the Court of Appeal decision that
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expanded on what is required to fall within the definition of an "establishment" for the purposes of the
EC Insolvency Regulation. The UK legislation (and the decision of the Supreme Court in Olympic Airlines)
does not deal well with this situation and in some circumstances leaves a hole in the PPF protection.

In Olympic Airlines, an unfortunate effect of the Court of Appeal decision was that the Olympic pension
fund was unable to be transferred to the PPF. A minor and temporary change was made to the pensions
legislation before the Supreme Court heard the appeal, intended to enable that particular pension
scheme to be transferred to the PPF, but this ‘sticking plaster’ has proved inadequate both in its specific
and more general impact.
Olympic Airlines – the case
The Supreme Court held, dismissing an appeal by the pension scheme trustees, that in deciding whether or not a
company has an establishment in the UK, it is not sufficient for a company to have a branch or office that fulfils no
function other than to assist in the internal administration associated with the winding up of a company.

Instead, there must be some subsisting business operation with economic activity that is external, onethat involves
business dealings with third parties. The exact nature of the business and the degree to which it must be visible to
outsiders may be open to argument. On the facts, the Supreme Court held that Olympic Airlines did not have an
establishment in England at the date of the UK winding-up petition and so no secondary proceedings could be opened
in the UK.
Olympic was a Greek state-owned airline that commenced operations in December 2003. On 17 September 2008, the
European Commission held that it had received illegal state aid from the Greek state. As a consequence, Olympic
ceased all commercial operations on 28 September 2009 and entered ‘special’ liquidation in Greece on 2 October
2009. Olympic had carried on business in England. It had a head office in London and premises at both Heathrow
and Manchester. Olympic employed 27 employees in England, all of whom were members of its pension and life
assurance scheme, which had a deficit of £16 million.
of a company made by the court under the Insolvency Act 1986 is such a qualifying event, but an order made in
Greece is not. In July 2010, the trustees of the pension scheme presented a petition to the High Court in England for a
winding up order in respect of Olympic, based on the debt due by Olympic to the scheme and Olympic’s inability to
pay. As Olympic had its COMI in Greece, the Greek special liquidation proceeding is the main proceeding for the
purposes of the EC Insolvency Regulation. Once main proceedings have been opened, a court in a different Member
State (such as the UK in this instance) can only open so called ‘secondary’ proceedings.

Need for an "establishment"

A condition to the opening of secondary proceedings is that the company has an "establishment" in the territory of the
Member State. Article 2(h) of the EC Insolvency Regulation currently defines an establishment as:
‘any place of operations where the debtor carries out a non-transitory economic activity with human means and
goods’.
In the Olympic Airlines case, at first instance, the judge (the then Chancellor, Sir Andrew Morritt) concluded that at
the time of the pension trustee’s application to court (following Re Office Metro9 this is regarded as the relevant date),
Olympic had an establishment in the UK. He therefore made the winding up order. On appeal, the Court of Appeal
overturned the first instance judgment and concluded that at the relevant date, Olympic had no such establishment.
The Supreme Court upheld the Court of Appeal’s decision and found that at the relevant time, the London premises
were not an establishment for the purposes of the Insolvency Regulation. In doing so, they relied on the Virgós-
Schmit report on the EC Insolvency Regulation10 and its reference in paragraph 71 to ‘economic activity’ being activity
‘exercised on the market (i.e. externally)’.

In giving his judgment, Lord Sumption (with whom the other Supreme Court justices agreed) emphasised that:
‘the definition [of establishment] must be read as a whole, not broken down into discrete elements, for each element
colours the others’
and that

 ‘the requirement that the activities should be carried on with the debtor’s assets and human agents suggests a
business activity consisting in dealings with third parties, not pure acts of internal administration’.

Therefore, when considering the definition of "establishment", it is necessary to identify more economic activity than
the mere process of winding up.

Lord Sumption also referred to the statement of the European Court of Justice (ECJ) in the Interedil case11 (2011) that
the activity must be ‘sufficiently accessible to enable third parties, that is to say in particular the company’s creditors,
to be aware of them’. Lord Sumption held that this was alluding to the same point regarding external activity as the
Virgós-Schmit report, and was not suggesting that the debtor ‘should simply be locatable or identifiable by a brass
plate on the door’.

At the time of the presentation of the petition, Olympic only retained a skeleton operation for the purposes of winding
up.

For that reason, the Supreme Court found that Olympic did not have an establishment in England. Therefore, under
the EC Insolvency Regulation, there was no jurisdiction to order a winding up in the UK.

The outcome for the Olympic pension trustees was disappointing – but the case also has a wider ambit.

Meaning of establishment
 The Supreme Court judgment followed the slightly higher test expressed by the Court of Appeal who expanded on the
definition of "establishment" set out in the EC Insolvency Regulation and as interpreted by the courts.

In Interedil, the ECJ held that for there to be an establishment there must be ‘a minimum level of organisation and a
degree of stability necessary for the purpose of pursuing an economic activity’. In that case, the presence of goods
alone did not meet the definition. The ECJ also held that an establishment must be determined on the basis of
objective factors which are ascertainable by third parties (as is the case in the determination of COMI).

The Court of Appeal took this further and introduced the requirement that the economic activity must also be
exercised on the market, i.e. externally. In doing so, the Court of Appeal relied heavily on the Virgós-Schmit report
which the Court of Appeal accepted as authoritative commentary on the EC Insolvency Regulation. The Supreme
Court clarified in Olympic Airlines that this interpretation is simply in line with the ECJ’s Interedil judgment.

Unnecessary secondary proceedings

The simplest answer to the problem would be if the Pensions Act 2004 included as qualifying events (for PPF entry)
main proceedings that have been opened in other EC Member States and which are afforded automatic recognition
under the EC Insolvency Regulation. In this case, the opening of the Greek special liquidation would then have been
sufficient for the PPF to assume responsibility for the pension scheme. A similar change to employment legislation
would also resolve the issue in relation to claims by employees on the UK National Insurance Fund (where in some
cases, under the Employment Rights Act 1996, a UK insolvency process is also needed).

This approach would have been not only in line with the aim of the EC Insolvency Regulation (and, indeed, the new
EC Insolvency Regulation 2015, taking effect from 2017) to avoid multiple insolvency proceedings which are
disruptive and can be value destructive, but would also have given the concept of automatic recognition under the EC
Insolvency Regulation its full and proper meaning.

Sticking plaster
After the Court of Appeal handed down its decision, the relevant UK legislation, the PPF Entry Rules 12 were changed
in 2014 to include an additional insolvency event in order to allow the Olympic pension scheme to transfer to the
PPF13. This amendment meant that the 'qualifying event' which allowed entry into the PPF would be deemed to have
occurred five years after the start of the Greek special liquidation, i.e. 2 October 2014.

Despite this legislative change designed specifically as a sticking plaster for Olympic, the pension trustees pursued
their appeal: it would have been better for the pension scheme members if the PPF compensation was treated as
payable from 29 May 2012 (i.e. the date when the order for winding-up was made in England by the first instance
court) rather than the later date of 2 October 2014 (under the amending 2014 legislation). An earlier date would have
minimised the period (between the commencement of the Greek liquidation proceedings and the relevant insolvency
event occurring) during which the PPF Board could require the pension trustees to claw back any overpaid benefits.

sponsoring employers, in particular whether or not they have a COMI outside the UK or an establishment in the UK